Toughest job in Saudi Arabia: Pivot from oil and calm fears

Khalid al-Falih, is a big supporter of the king’s agenda and now will be charged with the complicated task of sharply cutting the state’s persistent dependence on oil.New York Times | May 09, 2016, 17:19 IST

HOUSTON: He was known as the "maestro," the man whose every word was dissected by oil traders and moved markets. For two decades, Saudi Arabia's oil minister, Ali al-Naimi, was the architect of Saudi and OPEC cartel policies, including the one that has now sent the price of oil into a deep collapse.

But al-Naimi was unceremoniously ousted over the weekend, replaced as part of the new order in Saudi Arabia led by King Salman, aimed at a sweeping, if long-term, modernization of the country's economy.

Al-Naimi's successor, Khalid al-Falih, is a big supporter of the king's agenda and now will be charged with the complicated task of sharply cutting the state's persistent dependence on oil.

While the symbolism of the moves was clear, energy experts say they expect no quick or easy change in policy. Sharp departures in economic policy have been the exception rather than the rule for the conservative kingdom over many decades. And al-Falih wasted little time in trying to calm markets amid fears that already volatile oil prices could quickly become even more erratic.

"Saudi Arabia will maintain its stable petroleum policies," he said in a statement issued Sunday. "We remain committed to maintaining our role in international energy markets and strengthening our position as the world's most reliable supplier of energy."

That means Saudi Arabia will probably continue to pump as much oil as possible, helping to assure that gasoline prices for American consumers will stay low through the summer and that energy prices will be kept down for at least the rest of the year.

Inside Saudi Arabia, there is plenty of skepticism that the change at the highest level of the government will be sufficient to drive reforms promised by King Salman and engineered by his powerful son, Deputy Crown Prince Mohammed bin Salman, to reduce the dependence of the unsteady statist economy on the future of oil, which now appears increasingly unreliable.

Al-Naimi's ouster was part of a shake-up announced on Saturday aimed at restructuring the Saudi government to diversify the economy and improve services for Saudi citizens.

At the core of the plan released last month, in which al-Falih will now play a major role, is the transformation of the state-owned oil company Saudi Aramco into an industrial conglomerate.

Prince Mohammed has said that shares of the company will be sold publicly for the first time in its history and that the money will be put into a sovereign wealth fund that will be invested at home and abroad to supplement government revenues.

Saudi Aramco has long been the most effective institution in Saudi Arabia, but it has been intensely private about its finances and how it estimates the kingdom's oil reserves.

Opening up the company would subject it to new scrutiny that could change its culture in unpredictable ways, analysts say. And routing its worth into investments merely shifts the focus from one type of revenue — from oil — to others that are unpredictable and do nothing to increase the productivity of Saudi workers.

Al-Falih is a Texas A&M graduate in mechanical engineering who worked his way up the ranks of Saudi Aramco, eventually becoming its chief executive. He is viewed by international oil executives and analysts as an agent of change but still a technocrat who has long been tied to the old Saudi Aramco culture.

Oil executives and analysts described al-Falih as one of the most sophisticated and cosmopolitan officials in the world of oil, already widely recognized as a leader among the ministers of the Organization of the Petroleum Exporting Countries, who together control a third of the world's oil production.

They expect him to encourage a gradual rise in global oil prices while he moves the kingdom away from wasteful domestic energy consumption, a change that will allow the Saudis to increase oil exports in the years to come. He will take over a newly reorganized ministry that will now hold sway over all facets of energy and industry, not just oil.

"Khalid is a very effective executive with a very sophisticated understanding of policy," said Daniel Yergin, an energy historian and vice chairman of the global consulting firm IHS.

"It's a natural transition," Yergin said. "Now, there is a big new agenda ahead for Saudi Arabia, and Saudi Aramco is central to it. You need somebody who can implement and execute."

Al-Falih's first concern will be managing OPEC, which is deeply divided between members like Venezuela and Algeria that want to cut production to raise prices and the wealthier Persian Gulf kingdoms that are content to let the price remain low for a while.

Low prices are forcing higher-cost producers, like the companies drilling in the American shale fields, Canadian oil sands, and Brazilian and West African deepwater fields, to give up investing in expensive projects.

While King Salman will make the final decisions, al-Falih could use his influence to affect current policy. But his influence can go only so far.

The oil market has bounced around in recent days. Prices have been pulled down by persistent reports of record inventories in the United States and elsewhere, and pushed up by reports of rapid production declines in the United States, China, Mexico and now Canada, as fires swirl near the oil sands fields in Alberta.

Oil futures opened more than 2 percent higher in Asia on Monday, and were still more than 1 percent higher by mid-morning.

The wild cards in the market are numerous, including how much political instability in Libya, Iraq, Venezuela and Nigeria will curb their oil production.

With the oil price collapse that al-Naimi helped engineer approaching its third year, oil production in the United States alone has fallen from a high of nearly 9.7 million barrels a day to 8.8 million barrels.

Scores of U.S. companies have gone bankrupt, and cuts in exploration and production budgets have thrown roughly 120,000 employees out of work.

Al-Naimi tried to bridge the gaps among OPEC members, Russia and other international producers at a summit in Qatar last month, with a proposal to freeze production at current levels.

Those efforts were stymied by Prince Mohammed, who refused to go along with a freeze unless Iran went along. But Iran, which has sworn to produce several hundred thousand more barrels of oil a day, now that it has been relieved of sanctions over its nuclear program, would not cooperate.

Al-Falih can be expected to stay close to Prince Mohammed's line. Analysts say this is not likely to change anytime soon, as long as tensions between Saudi Arabia and Iran remain high, particularly over conflicts in Syria and Yemen.

But Middle East oil executives said a gradual shift in Saudi and OPEC policies might happen now that oil production in many countries was falling and prices had firmed somewhat in recent weeks.

They said al-Falih might conclude that prolonged low prices would cause a collapse in exploration investments that could set off a sudden, uncontrollable price increase. Such turbulence would not only jeopardize the world economy, but also spur a renewed drilling frenzy in the United States and other countries, which would only lead to another price collapse.

"Khalid al-Falih is likely to recognize the dangers of having a very low oil price for a long period," said Badr Jafar, president of Crescent Petroleum, an oil and gas company based in the United Arab Emirates. "He may shift the policy to ensure a soft landing on price recovery."

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The ongoing field development and EOR/IOR projects are expected to produce a cumulative of 54.6 million tonne (mt) of crude oil and 114 billion cubic meter (bcm) of natural gas in the next three to four years, the report said.